1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended September 25, 1999 Commission file number 1-6770 MUELLER INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 25-0790410 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 8285 TOURNAMENT DRIVE, SUITE 150 MEMPHIS, TENNESSEE 38125 (Address of principal executive offices) Registrant's telephone number, including area code: (901) 753-3200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, $ 0.01 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares of the Registrant's common stock outstanding as of October 29, 1999, was 34,971,226. -1- MUELLER INDUSTRIES, INC. FORM 10-Q For the Period Ended September 25, 1999 INDEX Part I. Financial Information Page Item 1. Financial Statements (Unaudited) a.) Consolidated Statements of Income for the quarters and nine months ended September 25, 1999 and September 26, 1998 3 b.) Consolidated Balance Sheets as of September 25, 1999 and December 26, 1998 5 c.) Consolidated Statements of Cash Flows for the nine months ended September 25, 1999 and September 26, 1998 7 d.) Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II. Other Information Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
For the Quarter Ended September 25, 1999 September 26, 1998 Net sales $ 287,880 $ 212,746 Cost of goods sold 216,341 163,952 ---------- ---------- Gross profit 71,539 48,794 Depreciation and amortization 9,268 5,650 Selling, general, and administrative expense 23,162 17,692 ---------- ---------- Operating income 39,109 25,452 Interest expense (3,078) (1,158) Environmental reserves - - Other income, net 2,143 1,809 ---------- ---------- Income before income taxes 38,174 26,103 Current income tax expense (602) (9,666) Deferred income tax benefit (expense) (11,232) 2,328 ---------- ---------- Total income tax expense (11,834) (7,338) ---------- ---------- Net income $ 26,340 $ 18,765 ========== ========== Weighted average shares for basic earnings per share 35,683 35,689 Effect of dilutive stock options 4,131 4,111 ---------- ---------- Adjusted weighted average shares for diluted earnings per share 39,814 39,800 ---------- ---------- Basic earnings per share $ 0.74 $ 0.53 ========== ========== Diluted earnings per share $ 0.66 $ 0.47 ========== ========== See accompanying notes to consolidated financial statements.
-3- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
For the Nine Months Ended September 25, 1999 September 26, 1998 Net sales $ 869,062 $ 665,265 Cost of goods sold 658,421 512,927 ---------- ---------- Gross profit 210,641 152,338 Depreciation and amortization 27,606 16,923 Selling, general, and administrative expense 74,229 53,946 ---------- ---------- Operating income 108,806 81,469 Interest expense (9,086) (3,701) Environmental reserves - (600) Other income, net 7,093 6,513 ---------- ---------- Income before income taxes 106,813 83,681 Current income tax expense (15,187) (25,908) Deferred income tax expense (18,158) (33) ---------- ---------- Total income tax expense (33,345) (25,941) ---------- ---------- Net income $ 73,468 $ 57,740 ========== ========== Weighted average shares for basic earnings per share 35,772 35,338 Effect of dilutive stock options 3,979 4,348 ---------- ---------- Adjusted weighted average shares for diluted earnings per share 39,751 39,686 ---------- ---------- Basic earnings per share $ 2.05 $ 1.63 ========== ========== Diluted earnings per share $ 1.85 $ 1.45 ========== ========== See accompanying notes to consolidated financial statements.
-4- MUELLER INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
September 25, 1999 December 26, 1998 Assets Current assets: Cash and cash equivalents $ 156,619 $ 80,568 Accounts receivable, less allowance for doubtful accounts of $5,323 in 1999 and $4,929 in 1998 170,464 155,601 Inventories: Raw material and supplies 29,205 26,544 Work-in-process 14,050 18,196 Finished goods 68,552 89,672 Gold - 320 ---------- ---------- Total inventories 111,807 134,732 Current deferred income taxes - 5,140 Other current assets 4,385 6,283 ---------- ---------- Total current assets 443,275 382,324 Property, plant and equipment, net 375,939 379,082 Goodwill, net 74,361 75,988 Other assets 31,247 37,300 ---------- ---------- $ 924,822 $ 874,694 ========== ========== See accompanying notes to consolidated financial statements.
-5- MUELLER INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share data)
September 25, 1999 December 26, 1998 Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 28,705 $ 19,980 Accounts payable 51,795 46,641 Accrued wages and other employee costs 31,324 26,636 Current deferred income taxes 3,089 - Other current liabilities 58,889 49,317 ---------- ---------- Total current liabilities 173,802 142,574 Long-term debt, less current portion 131,427 174,569 Pension and postretirement liabilities 11,523 12,584 Environmental reserves 14,043 16,321 Deferred income taxes 22,184 10,490 Other noncurrent liabilities 13,458 15,680 ---------- ---------- Total liabilities 366,437 372,218 ---------- ---------- Minority interest in subsidiaries 354 354 Stockholders' equity: Preferred stock - shares authorized 4,985,000; none outstanding - - Series A junior participating preferred stock - $1.00 par value; shares authorized 15,000; none outstanding - - Common stock - $.01 par value; shares authorized 100,000,000; issued 40,091,502; outstanding 35,334,294 in 1999 and 35,807,596 in 1998 401 401 Additional paid-in capital, common 258,516 258,171 Retained earnings (Since January 1, 1991) 346,666 273,198 Cumulative translation adjustment (5,773) (3,317) Treasury common stock, at cost (41,779) (26,331) ---------- ---------- Total stockholders' equity 558,031 502,122 Commitments and contingencies (Note 2) - - ---------- ---------- $ 924,822 $ 874,694 ========== ========== See accompanying notes to consolidated financial statements.
-6- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
For the Nine Months Ended September 25, 1999 September 26, 1998 Cash flows from operating activities Net income $ 73,468 $ 57,740 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 27,606 16,923 Minority interest in subsidiaries - (301) Deferred income taxes 18,158 33 Gain on disposal of properties (1,574) (1,676) Changes in assets and liabilities: Receivables (16,746) 623 Inventories 21,975 (5,096) Other assets 1,304 (3,984) Current liabilities 20,244 4,638 Other liabilities (3,061) (1,938) Other, net (343) (117) ---------- ---------- Net cash provided by operating activities 141,031 66,845 ---------- ---------- Cash flows from investing activities Businesses acquired - (39,859) Capital expenditures (26,742) (36,227) Proceeds from sales of properties 4,887 1,816 Escrowed IRB proceeds 6,022 9,549 Note receivable - (4,484) ---------- ---------- Net cash used in investing activities (15,833) (69,205) ---------- ---------- Cash flows from financing activities Proceeds from issuance of long-term debt 5,000 - Repayments of long-term debt (19,560) (12,037) Repayments on line of credit, net (19,840) - Acquisition of treasury stock (15,915) - Proceeds from stock options exercised including related tax benefits 812 6,803 ---------- ---------- Net cash used in financing activities (49,503) (5,234) ---------- ---------- Effect of exchange rate changes on cash 356 (263) ---------- ---------- See accompanying notes to consolidated financial statements.
-7- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) (In thousands)
For the Nine Months Ended September 25, 1999 September 26, 1998 Increase (decrease) in cash and cash equivalents 76,051 (7,857) Cash and cash equivalents at the beginning of the period 80,568 69,978 ---------- ---------- Cash and cash equivalents at the end of the period $ 156,619 $ 62,121 ========== ========== See accompanying notes to consolidated financial statements.
-8- MUELLER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) General Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. This quarterly report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K, including the annual financial statements incorporated therein by reference. The accompanying unaudited interim financial statements include all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Note 1 - Earnings Per Common Share Basic per share amounts have been computed based on the average number of common shares outstanding. Diluted per share amounts reflect the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, computed using the treasury stock method. Note 2 - Commitments and Contingencies The Company is subject to normal environmental standards imposed by federal, state, local, and foreign environmental laws and regulations. Based upon information currently available, management believes that the outcome of pending environmental matters will not materially affect the overall financial position and results of operations of the Company. In addition, the Company is involved in certain litigation as either plaintiff or defendant as a result of claims that arise in the ordinary course of business which management believes will not have a material effect on the Company's financial condition. Note 3 - Comprehensive Income Comprehensive income for the Company consists of net income and foreign currency translation adjustments. Total comprehensive income was $27,477,000 and $20,922,000 for the quarters ending September 25, 1999, and September 26, 1998, respectively and was $71,012,000 and $58,540,000 for the nine-month periods ending September 25, 1999, and September 26, 1998, respectively. -9- Note 4 - Industry Segments Summarized segment information is as follows: (In thousands)
For the Quarter Ended September 25, 1999 September 26, 1998 Net sales: Standard Products Division $ 213,163 $ 145,606 Industrial Products Division 68,895 61,468 Other Businesses 6,455 6,091 Elimination of intersegment sales (633) (419) ---------- ---------- $ 287,880 $ 212,746 ========== ========== Operating income: Standard Products Division $ 33,575 $ 18,732 Industrial Products Division 6,765 7,580 Other Businesses 1,956 567 Unallocated expenses (3,187) (1,427) ---------- ---------- $ 39,109 $ 25,452 ========== ==========
For the Nine Months Ended September 25, 1999 September 26, 1998 Net sales: Standard Products Division $ 634,094 $ 440,434 Industrial Products Division 219,683 207,737 Other Businesses 17,018 17,688 Elimination of intersegment sales (1,733) (594) ---------- ---------- $ 869,062 $ 665,265 ========== ========== Operating income: Standard Products Division $ 94,400 $ 64,248 Industrial Products Division 23,740 21,297 Other Businesses 3,441 2,676 Unallocated expenses (12,775) (6,752) ---------- ---------- $ 108,806 $ 81,469 ========== ==========
Certain amounts in the 1998 segment disclosures have been reclassified to conform with the 1999 presentation. -10- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Overview Mueller Industries, Inc. is a leading manufacturer of copper tube and fittings; brass and copper alloy rod, bar and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic fittings and valves; refrigeration valves and fittings; and fabricated tubular products. Mueller's plants are located throughout the United States and in Canada, France, and Great Britain. The Company also owns a short line railroad in Utah and natural resource properties in the Western U.S. The Company's businesses are managed and organized into three segments: (i) Standard Products Division (SPD); (ii) Industrial Products Division (IPD); and (iii) Other Businesses. SPD manufactures and sells copper tube, and copper and plastic fittings and valves. Outside of the United States, SPD manufactures copper tube in Europe and copper fittings in Canada. SPD sells these products to wholesalers in the HVAC (heating, ventilation and air-conditioning), plumbing and refrigeration markets, and to distributors to the manufactured housing and recreational vehicle industries. IPD manufactures and sells brass and copper alloy rod, bar and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies. IPD sells its products primarily to original equipment manufacturers (OEMs), many of which are in the HVAC, plumbing, and refrigeration markets. Other Businesses include Utah Railway Company and other natural resource properties and interests. SPD and IPD account for more than 97 percent of consolidated net sales and more than 86 percent of consolidated total assets. During 1998, the Company completed three acquisitions: (i) Mueller Copper Tube Products, Inc. (formerly known as Halstead Industries, Inc.) operates a copper tube mill in Wynne, Arkansas and a line sets factory in Clinton, Tennessee; (ii) B&K Industries, Inc., based in Elk Grove Village, Illinois, is a significant import distributor of residential and commercial plumbing products in the United States that sells through all major distribution channels including hardware co-ops, home centers, plumbing wholesalers, hardware wholesalers, OEMs and manufactured housing wholesalers; and (iii) Lincoln Brass Works, Inc. produces custom valve assemblies, custom metal assemblies, gas delivery systems and tubular products, primarily for the gas appliance market, at two manufacturing facilities in Tennessee. New housing starts and commercial construction are important determinants of the Company's sales to the HVAC, refrigeration and plumbing markets because the principal end use of a significant portion of the Company's products is in the construction of single and multi-family housing and commercial buildings. Profitability of certain of the Company's product lines depends upon the "spreads" between the cost of raw material and the selling prices of its completed products. The open market prices for copper cathode and scrap, for example, influence the selling price of copper tubing, a principal product manufactured by the Company. The Company attempts to minimize the effects of fluctuations in material costs by passing through these costs to its customers. "Spreads" fluctuate based upon competitive market conditions. -11- Results of Operations Net income was $26.3 million, or 66 cents per diluted share, for the third quarter of 1999, which compares with net income of $18.8 million, or 47 cents per diluted share, for the same period of 1998. Year-to-date, net income was $73.5 million, or $1.85 per diluted share, which compares to net income of $57.7 million, or $1.45 per diluted share, for 1998. During the third quarter of 1999, the Company's net sales were $287.9 million, which compares to net sales of $212.7 million, or a 35 percent increase over the same period of 1998. Net sales were $869.1 million in the first nine months of 1999 compared to $665.3 million in 1998. During the third quarter of 1999, the Company's manufacturing businesses shipped 196.0 million pounds of product compared to 150.7 million pounds in the same quarter of 1998. The Company's manufacturing businesses shipped 615.0 million pounds of product in the first nine months of 1999, or 32.0 percent more than the same period of 1998. This increase in net sales and shipments includes volume from businesses acquired in the second half of 1998. Third quarter and year-to-date operating income increased primarily due to: (i) higher sales volumes particularly at copper tube and line sets; (ii) spread improvements at copper tube; and (iii) earnings at our acquired businesses. Increased operating income was partially offset by losses at our European operations. Selling, general, and administrative expense as well as depreciation and amortization increased primarily due to acquired businesses. Interest expense for the third quarter of 1999 totaled $3.1 million compared to $1.2 million in the same quarter of 1998. For the first nine months of 1999, interest expense was $9.1 million compared to $3.7 million for the same period of 1998. Interest expense increased due to the increase in long-term debt following the issuance of the $125 million term note, partially offset by scheduled repayments of long-term debt. The Company continues to achieve its long-term objective of divesting certain natural resource properties and businesses. During April 1999, the Company sold 100 percent of its interest in Alaska Gold Company. As a consequence of this sale transaction, the Company believes it has realized for federal tax purposes an ordinary loss of approximately $70 million which will reduce taxable income in 1999. Recognition of this tax attribute, previously recognized as a deferred tax asset less an appropriate valuation allowance, reduced the Company's effective tax rate to approximately 31.2 percent in 1999. The Company computed its income tax provision for the first three quarters of 1999 using this effective income tax rate. This effective rate also reflects the benefit of a lower federal provision relating to the recognition of net operating loss carryforwards, and a lower state provision associated with incentive IRB financings. -12- Liquidity and Capital Resources Cash provided by operating activities during the first nine months of 1999 totaled $141.0 million which is primarily attributable to net income, depreciation and amortization, and deferred income taxes. During the first nine months of 1999, the Company used $15.8 million in investing activities, consisting primarily of $26.7 million in capital expenditures offset by $6.0 million of proceeds from escrowed IRB funds and $4.9 million of proceeds from sales of properties. Cash used in investing activities was funded with existing cash balances, cash from operations, plus escrowed IRB proceeds. During the first nine months of 1999, the Company used $49.5 million in financing activities primarily for scheduled payments on long-term debt and repayment of a line-of-credit. In addition, the Company purchased 500,000 shares of its common stock from a former director in August, and 60,000 shares of its common stock from its Chief Executive Officer in April. The Company has a $100.0 million unsecured line-of-credit agreement (the Credit Facility) which expires in May 2001, but which may be extended for successive one-year periods by agreement of the parties. Borrowings under the Credit Facility bear interest, at the Company's option, at (i) prime rate less .50 percent, (ii) LIBOR plus .27 percent subject to adjustment, or (iii) Federal Funds Rate plus .65 percent. There are no outstanding borrowings under the Credit Facility. At September 25, 1999, funds available under the Credit Facility was reduced by $5.0 million for outstanding letters of credit. At September 25, 1999, the Company's total debt was $160.1 million or 22.3 percent of its total capitalization. The Company's financing obligations contain various covenants which require, among other things, the maintenance of minimum levels of working capital, tangible net worth, and debt service coverage ratios. The Company is in compliance with all debt covenants. The Company has planned for approximately $50 million of capital additions and improvements in 1999. The largest ongoing project is the modernization of our recently acquired copper tube mill in Wynne, Arkansas. This project, which involves expenditure of approximately $24 million over a two-year period, will improve yield, productivity, and throughput when completed. The Company is also planning a new $10 million investment at our Port Huron, Michigan brass rod mill. This investment, which is expected to be complete near the end of 2000, will increase our casting capacity, improve yield, and reduce conversion costs. The Company's $33.4 million copper casting facility in Fulton, Mississippi became operational during the first nine months of 1999. This facility allows the use of a lower-cost mix of copper scrap and cathode when market conditions warrant. Mueller also has programs under way to make near-term improvements at its European operations. Further, the Company is also considering various long-term capital investments for these businesses which will further improve their cost structure and productivity. -13- On October 18, 1999, the Company's Board of Directors authorized the repurchase of up to four million shares of the Company's common stock from time to time over the next year through open market transactions or through privately negotiated transactions. The Company will have no obligation to purchase any shares and may cancel, suspend or extend the time period for the purchase of shares at any time. The purchases will be funded primarily through existing cash and cash from operations. The Company may hold such shares in treasury or use a portion of the repurchased shares for employee benefit plans, as well as for other corporate purposes. Management believes that cash provided by operations and currently available cash of $156.6 million will be adequate to meet the Company's normal future capital expenditure and operational needs. The Company's current ratio remains strong at 2.6 to 1. PART II. OTHER INFORMATION Item 5. Other Information The following discussion updates the disclosure in Item 1, Business, in the Company's Annual Report on Form 10-K, for the year ended December 26, 1998. Environmental Matters Mueller Copper Tube Products, Inc. (MCTP) (formerly known as Halstead Industries, Inc.), a wholly-owned subsidiary, has commenced a cleanup and remediation of soil and groundwater at its Wynne, Arkansas plant. MCTP will remove trichloroethene (TCE), a cleaning solvent used by MCTP, left in the soil as a result of its historical operations. MCTP will also expand its prior investigation to points offsite to determine the extent, if any, that TCE has migrated beyond MCTP's property. Actions taken by MCTP are being reviewed and approved by the Arkansas Department of Environmental Quality. The Company anticipates that MCTP will spend up to an estimated $5 million over the next several years on these activities and established a reserve for this project in connection with the acquisition of MCTP. Other Businesses Operations of one of the Company's subsidiaries, Utah Railway Company, continue to be unfavorably affected by a 1998 fire at one of the coal mines it serves. Limited production has resumed at the mine. Mueller has filed a business interruption insurance claim for the loss of earnings due to the fire. At this time, the amount to be recovered from our insurer cannot be determined. Subsequent to quarter end, Utah Railway Company purchased the stock of the Salt Lake City Southern Railroad Company, Inc. (SLCS) from RailTex, Inc. for $675 thousand. SLCS operates pursuant to an easement on approximately 25 miles of track, owned by the Utah Transit Authority, from downtown Salt Lake City to near Draper, Utah. -14- Year 2000 Program The Company established a Year 2000 program to evaluate, confirm compliance and identify any necessary changes to its information technology (IT) and operating (non-IT) systems to address Year 2000 requirements. The Company retained a consulting firm specializing in this area to assist in the program. Their final project was completed at the end of the second quarter. To date, the Company has expensed approximately $850 thousand related to this outside consultant. Mueller has completed its assessment and inventory of its IT systems. Based on this assessment, the Company has replaced certain hardware and modified its developed software code at a cost which is immaterial. Certain business systems of the Company's European businesses are not Year 2000 compliant, but this is being resolved within the context of an overall upgrade to these information systems that began in the third quarter of 1999. The Company has completed its assessment and inventory of non-IT systems for all of its North American manufacturing facilities. A small number of non-IT systems were not Year 2000 compliant. The Company has replaced and/or corrected and certified these systems as compliant during the third quarter at a cost that is not material. To the extent that Mueller does not identify all non-IT systems that are not Year 2000 compliant, production on individual pieces of equipment might be curtailed for a period of time. However, management believes that the risk that it would be unable to maintain customer services due to Year 2000 equipment failures is low. The Company is in the process of determining its critical product and service supplier Year 2000 readiness. All critical North American suppliers have been surveyed with a current response rate of about 90 percent. Mueller's European operations are continuing this process, and are on plan to be completed in the fourth quarter. The Company will continue to follow up with non-responses and all inquiries to ensure, to the best of its ability, that these suppliers will be Year 2000 compliant. Nonetheless, there can be no assurance that the systems used by these suppliers will be remediated in a timely manner, which, if not remediated, may have an adverse effect on Mueller. Mueller is currently working on the development of Year 2000 contingency plans. As Year 2000 efforts have progressed, areas of potential operational risk have been identified for contingency plan development. These contingency efforts focus on both pro-active and reactive tasks including manual procedures, reports and documentation, critical materials inventories and priority planning. -15- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders for the quarter ended September 25, 1999. Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as part of this Quarterly Report on Form 10-Q. (b) During the quarter ended September 25, 1999, the Registrant filed no Current Reports on Form 8-K. Items 1, 2, 3, and 4 are not applicable and have been omitted. -16- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 3, 1999. MUELLER INDUSTRIES, INC. /s/ Kent A. McKee Kent A. McKee Vice President and Chief Financial Officer /s/ Richard W. Corman Richard W. Corman Corporate Controller -17- EXHIBIT INDEX Exhibits Description Page 19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders for the quarter ended September 25, 1999. Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this Quarterly Report on Form 10-Q. 27.1 Financial Data Schedule (EDGAR filing only) -18-